Reinsurers Look To Benefit From Flood Bill’s Private-Market Focus

It was passed April 6 by voice vote by the House Subcommittee on Insurance, Housing and Community Opportunity. Industry officials believe the full House Financial Services Committee is likely to take up the bill in early May.

In a statement to NU, Frank Nutter, president of the Reinsurance Association of America (RAA), says his association "enthusiastically supports" language in the recent House NFIP legislation that promotes the utilization of reinsurance.

The language specifically allows FEMA to utilize private-market reinsurance capacity to minimize the likelihood that the program would need to borrow additional funds from the Treasury.

In addition, the bill allows FEMA to assess the capacity of the private reinsurance market by seeking proposals to assume a portion of the program's risk, and it directs FEMA to submit a report on such assessment within six months of the bill's enactment.

Nutter says the provision will allow the NFIP to prepare for losses, unlike now, where it operates on a pay-as-you-go system.

He says the "NFIP is wise to explore that option and relieve taxpayers of the crushing financial burden of repaying debt."

Besides giving FEMA the authority to look into changing the basic concept of the program, the bill also gives FEMA new powers and directives.

For example, it gives the agency the authority to tear down and rebuild flood-damaged properties. This authority should be considered by FEMA "as an eligible activity" for the purpose of mitigation assistance, the bill says, with the caveat that such action "must be cost effective."

The bill also makes changes in the premium structure for the flood insurance program.

First, it increases the annual cap on premium rates from 10 percent to 20 percent, but phases in premiums for properties newly mapped into the program.

It does so by setting a 50 percent discount from full-risk rates for newly mapped properties, with annual rate increases thereafter limited by a 20 percent annual cap.

It also phases in full-risk rates for nonresidential properties, as well as second homes and vacation homes.

While the bill contains several improvements, it fails to deal completely with the subsidy issue—especially the issue of the $17.5 billion deficit the program is running.

Ironically, while members of Congress are ballyhooing the latest budget deal, which cuts the current budget by $38 billion, certain provisions of the NFIP legislation postpone dealing with the deficit issue.

In this case, it kicks it down the road for a minimum of the five-year life of the proposed legislation, until Sept. 30, 2016.

It does so because raising rates and introducing new areas into the program has created acute political difficulties for some members of Congress.

As stated in a document provided by congressional staff to members of the subcommittee that passed the bill, the "immediate concerns of many local communities and members of Congress are the new flood-insurance rate maps and the mandatory-purchase requirement."

The bill addresses these concerns by re-establishing an advisory council on mapping that existed for five years, from 1995 to 2000. These councils consist of FEMA officials and private-sector experts. Under the proposed legislation, FEMA would be required to adjust new maps within six months of being provided with the recommendations of these councils.

FEMA would also be given the power under the bill to suspend mandatory-purchase requirements for up to three years for communities that oppose being included and meet certain criteria.

These provisions are certain to be criticized by the Government Accountability Office, which several months ago cited the NFIP as one of 30 "high risk" programs, i.e., programs costing the government unnecessary amounts of money.